Sioen Industries NV (ENXTBR:SIOE) is trading with a trailing P/E of 27.1x, which is higher than the industry average of 20.9x. While this makes SIOE appear like a stock to avoid or sell if you own it, you might change your mind after I explain the assumptions behind the P/E ratio. In this article, I will break down what the P/E ratio is, how to interpret it and what to watch out for. Check out our latest analysis for Sioen Industries
Breaking down the P/E ratio
The P/E ratio is a popular ratio used in relative valuation since earnings power is a key driver of investment value. By comparing a stock’s price per share to its earnings per share, we are able to see how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for SIOE
Price-Earnings Ratio = Price per share ÷ Earnings per share
SIOE Price-Earnings Ratio = €29.95 ÷ €1.105 = 27.1x
On its own, the P/E ratio doesn’t tell you much; however, it becomes extremely useful when you compare it with other similar companies. We want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as SIOE, such as size and country of operation. A common peer group is companies that exist in the same industry, which is what I use. Since SIOE’s P/E of 27.1x is higher than its industry peers (20.9x), it means that investors are paying more than they should for each dollar of SIOE’s earnings. As such, our analysis shows that SIOE represents an over-priced stock.
A few caveats
However, before you rush out to sell your SIOE shares, it is important to note that this conclusion is based on two key assumptions. Firstly, our peer group contains companies that are similar to SIOE. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared higher growth firms with SIOE, then its P/E would naturally be lower since investors would reward its peers’ higher growth with a higher price. The second assumption that must hold true is that the stocks we are comparing SIOE to are fairly valued by the market. If this does not hold, there is a possibility that SIOE’s P/E is lower because our peer group is overvalued by the market.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.